Hawaiian Court Finds That Employees Were Not Entitled To Resort Service Charges

Posted by Greg Mersol on November 01, 2011

Employees’ Tip Ball Fails To Save Game; Series Continues

This blog and Baker Hostetler’s HospitalityLawg often come across the same cases, particularly because the hospitality industry is increasingly the target of employment class actions.  The entry below was largely prepared by our hospitality industry team, who we thank for their efforts.

We along with our sister blog reported a few weeks ago that a hote­lier was found li­able by a Hawaii fed­eral court for not dis­trib­ut­ing 100% of "ser­vice charges" to wait staff as tips.  That re­sult was pred­i­cated on read­ing the fol­low­ing two laws in tan­dem:

  • Hawai­ian Revised Statutes § 481B-14, which re­quires ser­vice charges ap­plied by ho­tels or restau­rants to be dis­trib­uted as “tip in­come” un­less it is clearly dis­closed that the ser­vice charge will be used to pay some­thing other than wages or tips of em­ploy­ees.
  • Hawaii Re­vised Statutes § 388-6 con­cern­ing “With­hold­ing of Wages.” This statute pro­hibits em­ploy­ers from de­duct­ing, re­tain­ing or oth­er­wise caus­ing not to be paid “wages” to an em­ployee. 

In the ear­lier case, the de­fen­dant hote­lier was un­suc­cess­ful in ar­gu­ing that that the above statutes were am­bigu­ous.  But if you watched the World Se­ries, you know that dif­fer­ent um­pires have dif­fer­ent strike zones.  So if we ex­tend Chief Jus­tice Robert's fa­mous metaphor, we shouldn't be sur­prised that a dif­fer­ent court had a dif­fer­ent call.

In Vil­lon, Dis­trict Court Judge Leslie Kobayashi un­der­took a de­tailed re­view of both statutes and con­cluded that the plain­tiffs may have chased a bad pitch.  Here's a short play-by-play:

  • Judge Kobayashi first noted that § 481B-14 used the phrase "tip in­come," while § 388-6 re­ferred to "tips."  From this she noted that the Hawaii Leg­is­la­ture had elected to use dif­fer­ent ter­mi­nol­ogy, but that it wasn't "read­ily ap­par­ent" what the dis­tinc­tion was.
  • This am­bi­gu­ity al­lowed Judge Kobayashi to delve into the leg­isla­tive his­tory, which proved to be il­lu­mi­nat­ing.  Turns out §481B-14 was orig­i­nally pro­posed as an amend­ment to the Hawaii wage and hour laws, in­clud­ing § 388-6.  But, based on con­cerns raised by the In­ter­na­tional Long­shore and Ware­house Union and the Hawaii De­part­ment of La­bor and In­dus­trial Re­la­tions, the bill was con­verted to a new sec­tion in the con­sumer pro­tec­tion law with the pur­pose of en­hanc­ing "con­sumer pro­tec­tion with re­spect to ser­vice charges im­posed by ho­tels and restau­rants on the sale of food and bev­er­ages." 
  • From this, Judge Kobayashi de­ter­mined that the laws were not of the same sub­ject mat­ter, and thus could not be con­strued with ref­er­ence to each other.  

Judge Kobayashi then cleared the bases as far as those fans of the dis­pas­sion­ate um­pire ap­proach are con­cerned:

This Court is sym­pa­thetic to Plain­tiffs' po­si­tion.  There is an un­just and gap­ing hole in the statute: if De­fen­dant ul­ti­mately pre­vails on Plain­tiffs' Chap­ter 480 claim and Plain­tiffs' can­not en­force the al­leged § 481B-14 vi­o­la­tion through any other means, ar­guably no one will en­force the vi­o­la­tion. . . . Un­for­tu­nately, it is not this Court's place to sit as the Leg­is­la­ture does and try to cre­ate a new en­force­ment mech­a­nism to re­place or sup­ple­ment an old one, no mat­ter how in­ad­e­quate and un­fair the orig­i­nal statu­tory scheme may be.

In the end, Judge Kobayashi elected to de­fer to a closer, the Hawaii Supreme Court, as to the ques­tion of whether food and bev­er­age em­ploy­ees can en­force al­leged vi­o­la­tions of § 481B-14 through Hawaii's wage and hour laws.  We can bet that the plain­tiffs’ bar will be look­ing to pitch its way out of a jam when it comes to the pre­cise lan­guage of the ques­tions to be cer­ti­fied.       

The Bottom Line:  Tipping policies are becoming a target for class action wage and hour litigation.  There is split of authority in Hawaii regarding the scope of relief, and the treatment of “service” fees that will be of great significance to hospitality employers.

Second Circuit Finds FLSA Collective Actions and State Law Class Actions Compatible

Posted by Greg Mersol on September 26, 2011

One of the hottest topics in class/collective action litigation this year has been the availability of both an FLSA collective action and a state law class action in the same suit. We've already written several times about some of these cases, with a distinct difference in approach and outcome among the various courts. Some courts have found the two schemes incompatible, while others have found that the two different schemes could be maintained in the same lawsuit.

The arguments in favor of incompatibility are compelling. Section 16(b) of the FLSA, 29 U.S.C. § 16(b), the statute creating the collective action vehicle, was passed in response to "a national emergency spawned by out-of-control litigation of employee minimum wage and overtime claims." Ellis v. Edward D. Jones & Co., 527 F. Supp. 2d 439, 450 (W.D. Pa. 2007). Indeed, the legislative history reflects that section 16(b) was passed to limit collective claims. In addition, having simultaneous opt-in and opt-out classes will invariably breed confusion, as class members will need to make opposite elections regarding which, both, or either of the two claims they may elect to participate in.

On September 26, 2011, the Second Circuit swept these concerns aside and held that state law claims could be maintained as a class. In Shahriar v. Smith & Wollensky, Case No. 10-1884-cv (2d Cir. 2011), the plaintiffs were waiters working for the Smith & Wollensky Park Avenue restaurant in New York. They contended that certain of the restaurant's tipping practices, such as requiring the sharing of tips with non-service workers, violated the FLSA, New York law, or both. While the opinion is not entirely clear on this point, it appears that the district court conditionally certified the FLSA class in 2008, and a total of 25 plaintiffs (including the original plaintiffs) opted in. The defendant took no further steps with respect to class action treatment of the state law claims until the eve of trial, when the court granted certification on the New York claims. The district court expressed concern over the late challenge to a state law class and practical concerns as to what would happen with respect to the state law claims. While finding it a close call, the court certified the case for a class of 275 wait staff employees. The Second Circuit granted review of that decision under Federal Rule 23(f).

The court of appeals affirmed. It largely ignored the statements in the legislative history over the need to limit FLSA classes and instead attributed section 16(b)'s opt-in requirement to a fear of retaliation by employers. Curiously, all of the cases cited by the court cited for this proposition about Congress’s intent from the 1940s were from district courts in the Second Circuit from at least 50 years after section 16(b)'s passage. Analyzing the issue as one of the exercise of supplemental jurisdiction under 28 U.S.C. section 1367, it therefore found no compelling reason why the district court could not hear the state law claims as a class. It also noted holdings of other courts finding the two schemes compatible, such as Ervin v. OS Restaurant Services, Inc., 632 F.3d 971 (7th Cir. 2011), a decision we wrote about on January 26.

Since it ignored the statute's legislative history, the Second Circuit reached the unsurprising conclusion that in most cases section 16(b) and Rule 23 would not be incompatible. It also analyzed the district court's application of Rule 23 and found there was no abuse of discretion in certifying the class because all of the wait staff were subject to the same challenged tip practices. What may have made the case easier for the court was the fact that all of the plaintiffs were from the same facility and the same state, thus minimizing potential differences among them.

The bottom line: There remains a split of authority as to whether a plaintiff can maintain both a state law class action and a federal collective action in the same case.

Court Finds That Employer's Failure to Pay "Service Charges" To Tipped Employees Violated Hawaiian Law

Posted by Joyce Ackerbaum Cox on September 09, 2011

In an August decision from a federal court in Hawaii, a hotelier was found liable for unpaid wages to a group of over 100 wait staff employees who claimed the company cheated them out of tips by retaining a portion of gratuity fees added to guest checks. The Planitiffs' factual allegations focused on the fail­ure of management to disclose that 100 percent of the “service charge” added to resort customers’ food and beverage bills would not be distributed to wait staff. In connection with this factual claim, Plaintiffs pointed to two Hawaii state wage laws:

Hawaiian statute, section 481B-14, which requires service charges applied by hotels or restaurants to be distributed as “tip income” unless it is clearly disclosed that the service charge will be used to pay some­thing other than wages or tips of employees.

Hawaii Revised Statutes, section 388-6 concerning “Withholding of Wages.” This statute prohibits employers from deducting, retaining or otherwise causing not to be paid “wages” to an employee. “Wages” under Hawaiian law are broadly defined to include “tips or gratuities of any kind.”

The hotelier's arguments that the Hawaii statutes at is­sue were ambiguous and inconsistent with the Fair La­bor Stan­dards Act were rejected by the Court, which noted that states are free to provide greater protections to employees than that set forth under the FLSA. A trial will be held at a fu­ture date to determine the amount of damages the employees are entitled to receive.

The Bottom Line: Employers must be cog­nizant of the wage laws of the states in which they oper­ate and recognize that such laws may provide greater protections than the FLSA. While the FLSA clearly excludes nondiscretionary service charges from the definition of “tips,” some state laws may not, or may re­quire the employer to take additional steps to ensure such fees are not owed to employees.

Read additional details about this case on our sister blog, HospitalityBlawg.

Maryland Court Rules Employer Cannot Participate in Employee Tip Pool

Posted by Joyce Ackerbaum Cox on March 30, 2011

Once again, tip pool cases are getting attention in the federal courts.  Most recently, several former employees of two taverns in Baltimore sued under the Fair Labor Standards Act (“FLSA”) and Maryland state laws alleging unlawful wage and hour practices.  Gionfriddo vs Zink.pdf, 2011 WL 855799 (D.Md. March 11, 2011).  Specifically, they claimed the owner of the two taverns where they worked, Jason Zink, was improperly receiving money from the collective tip pool.

Mr. Zink did operate the taverns and supervise the employees; however, he also often served as a bartender.  It was for his role as a bartender, where he served drinks and talked with patrons, that he received a portion of tips from the tip pool.  The tip pool was distributed to the bartenders based on the number of hours worked by each bartender.  Mr. Zink did not take any salary from either tavern.  “At the crux of Plaintiff’s case is their contention that, although Mr. Zink frequently worked along side the bartender Plaintiffs and contributed to the collective tip pool, he was prohibited from retaining any of these tips as a result of his status as the owner of the taverns.” 

The bartenders were tipped employees, earning a subminimum wage.  The FLSA permits employers to pay employees who regularly and customarily receive at least $30/month in tips a direct wage of $2.13/hr and then take a tip credit to satisfy the $7.25/hr minimum wage requirement. If, however, tipped employees are required to participate in a tip pool with other employees who do not customarily receive tips, then the tip pool is invalid, and the employer cannot take the tip credit.  It was undisputed by both sides in this case that bartending is typically a tipped occupation.

In an issue of first impression in both the Maryland District Court and the Fourth Circuit, the question to be answered was whether an employer, like Mr. Zink, may simultaneously be a “tipped employee” under the FLSA.  In what was deemed as “not a close case,” the Court concluded, like many other courts that have considered the issue, that the FLSA expressly prohibits employers from participating in employee tip pools.  Here, the Court determined, Mr. Zink, as the sole owner of the taverns, was the sole beneficiary of the tip credit provision, and to allow him to participate in the tip pool “would broaden the FLSA’s tip credit provisions to a point where they would become meaningless.”  Accordingly, the Court granted partial summary judgment on this issue to the Plaintiff bartenders. 

The Bottom Line:  Carefully analyze existing tip pools to ensure those participating are properly “tipped employees” because the failure to do so may result in invalidating the tip pool. 

Seventh Circuit Finds That Overtime State Class Actions And FLSA Collective Actions Are Not Incompatible

Posted by Joyce Ackerbaum Cox on January 26, 2011

Restaurants, hotels, and others in the hospitality industry recently have been faced with a rash of collective action cases brought under the Fair Labor Standards Act (FLSA) challenging their tip pooling practices.  From high-end, trendy restaurants in Manhattan to large, popular chains with multiple locations throughout the country, there has been a significant increase in claims that such employers are illegally pooling tips allegedly due to employees, and that the employees, as a result, have not received the appropriate minimum wage and overtime.  Now, these same employers should take note of the recent decision by the Seventh Circuit in Ervin v. OS Restaurant Serv, 09-3029 (7th Cir. Jan. 18, 2011), which adds an additional weapon to the arsenal of plaintiffs’ lawyers pursuing these claims – the potential ability to litigate supplemental state law claims as class actions under Rule 23(b)(3) within the same lawsuit as the FLSA claims.

In Ervin, the plaintiffs were a group of former tipped employees at Outback Steakhouse in Illinois who challenged the restaurant’s pay practices.  They sued Outback under the FLSA and Illinois state wage acts claiming Outback violated the minimum wage and maximum hour provisions of both the federal and state laws. The Plaintiffs moved for conditional certification under section 16(b) of the FLSA (29 U.S.C. § 216(b)).  At the same time, they moved for certification of three different classes under Rule 23(b)(3) for the state law claims.  The magistrate recommended, that the FLSA collective action should proceed, but the class action should not. While the magistrate was satisfied the 23(a) elements had been met (numerosity, commonality, typicality, and adequacy requirements), he decided that the superiority element under Rule 23(b)(3) – that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy – could not be satisfied.  In fact, he went so far as to say that a Rule 23(b)(3) class  “will never be superior when another part of the case is proceeding under FLSA section 16(b).”  Ervin, 09-3029 at 6. 

In adopting the magistrate’s ruling, the district court allowed the FLSA collective action to move forward, and refused to certify the class action because there was “clear incompatibility between the ‘opt out’ nature of a Rule 23 action and the ‘opt in’ nature of a Section 216 action.” Id.  The court further concluded that this conflict automatically meant the class action device was not a superior method for resolving the state law claims.

On appeal, Outback raised, and the Seventh Circuit considered, only the narrow issue of whether the plaintiffs could meet the requirements of Rule 23(b)(3). Outback argued that permitting a plaintiff who ends up in Rule 23 class because he failed to opt out to proceed as part of the class is “in tension with the idea that disinterested parties were not supposed to take advantage of the FLSA.”  Id. at 12.  The Seventh Circuit disagreed, finding that such a plaintiff will not be entitled to any FLSA remedy, and concluded that based on the plain language of the FLSA itself, “[n]othing…suggests that the FLSA is not amenable to state-law claims for related relief in the same federal proceeding.”  Id. at 11.  The court also rejected Outback’s argument that a combined action has a high risk for confusion when notice is sent to potential class members. The court stated that this potential is no worse that “countless others that district courts face with class actions” and that it would be preferable for notice to come from a single court in a unified proceeding, rather than multiple courts.  Id. at 14.  As a result, the Seventh Circuit reversed the district court’s denial of class certification and remanded it to the district court for further proceedings.

The Bottom Line: The implications of the case could be widespread as courts are divided across the country on the issue of whether FLSA and state law class claims can co-exist within one case.  What is certain is that this issue is not going to be resolved uniformly anytime in the near future, and will most likely make its way to the Supreme Court for final clarity.  In the meantime, decisions like this translate into the prospect of increased litigation and costs associated with wage claims for employers.

Summary Judgment Denied, But No Class Certification In Tip Dispute

Posted by Greg Mersol on October 12, 2010
On September 30, 2010, the United States District Court for the District of Massachusetts entered an interesting order in a case involving multiple issues under the Fair Labor Standards Act.  

In Travers v JetBlue Airways.pdf., airline JetBlue engaged an independent contractor named Flight Services and Systems ("FSS") to provide skycaps Boston Logan Airport.  Because these skycaps received tips from passengers, the employer (more about that in a minute) took advantage of the tip credit of 29 U.S.C. § 203(m) to meet its minimum wage obligations.  At some point, however, the airline instituted a $2 "curbside check-in fee" that cut into the skycaps' tip income. In many cases, the plaintiffs claimed, they "covered" the fee themselves or, in other words,  paid the fee from the tips they had received.  The parties disputed whether their doing so was voluntary or not.  In either case, the plaintiffs contended that their payment of the fee undercut the tip credit and therefore caused them not to be paid the minimum wage.  The plaintiffs also complained that they were subject to a policy that made them liable for shortages, which also destroyed the tip credit. 
 

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21 Club "Gets Served" On Overtime Class Claims

Posted by Todd Dawson on August 23, 2010

"......and Please Remember to Tip Your Bartender And Waitress."

The famous 21 Club in New York was on the Curly end of a Larry-esque double-slap from the Southern District of New York last week. Alderman v. 21 Club.pdf Case No. 1:09-cv-2418 (Aug. 20, 2010). By way of background, the plaintiff employees in Alderman are seeking to represent a proposed class of 21 Club banquet staff members on wage/hour claims under the Fair Labor Standards Act and New York law, based on their receipt of gratuities. Proposed class members who work a particular event at the restaurant share an automatic 18 percent gratuity charged on the total bill. The plaintiffs, who apparently don't believe that these gratuities are gratuitous, claim that the tips should be included in their regular rate for purposes of calculating overtime pay. And, because the only thing better than getting more is getting even more, the plaintiffs also claim that the 21 Club collects more than 18 percent in service charges on banquet bills, and that they should get the whole enchilada.

The class members, however, are all covered by a collective bargaining agreement as good hard-workin', dues-payin' members of UNITE Local 100. It seems this collective bargaining agreement, which the Court described as "comprehensively set[ting] forth the terms and conditions of employment," included a provision that "specifically" (again, in the Court's words) entitled to banquet service staff only to an 18 percent gratuity on the entire bill for an event. The employer surprisingly interpreted this provision as entitling banquet service staff only to an 18 percent gratuity on the entire bill for an event.

As it turns out, the agreement apparently wasn't as "comprehensive" or "specific" as the Court first intimated. Thus, the Court rejected the employer's argument that the plaintiffs' entitlement to the 18 percent gratuity charge was governed by the collective bargaining agreement, and held instead that their claims arose under a New York state law prohibiting an employer from withholding any portion of a restaurant employee's gratuities. So what's the big deal there, right? Isn't that the law, that federal preemption doesn't apply if it's a right created under state law rather than under the collective bargaining agreement?

The big deal is that the statute specifically excludes "banquets and other special functions where a fixed percentage of the patron's bill is added for gratuities." Yes, you read that right. Banquets are excluded. The rule against withholding gratuities does not apply to employees who work banquets. (That's why we put the quote in bold.)

Well, how in the halloumi cheese did the plaintiffs survive dismissal, you ask? Because, the Court held, "the statute is somewhat confusing because the assurance of the employee's rights in the first sentence is followed by the latter portion of the last sentence which states that the statute is not applicable to functions where an amount is added to the patron's bill for gratuities." And, the Court reasoned, the plaintiffs couldn't be asserting a claim under the collective bargaining agreement anyway because the agreement only entitled them to 18 percent and they wanted more than 18%. With all due respect to the Court, that seems a bit of a head scratcher. The statute seems pretty clear to us (and a number of New York state courts) in saying that it's not intended to create rights on behalf of banquet employees. Since the labor agreement is the only other potential source of rights, the field of possibilities seems pretty narrow.

But wait, there's more! For slap #2 in its role of Larry to the 21 Club's Curly, the Court also held that the plaintiffs were not obligated to arbitrate their FLSA claims. The Court noted in this regard that the 18 percent gratuity discussed above might not be a gratuity at all, and might instead be an automatic service charge that would have to be included in the FLSA regular rate. But, numerous New York state courts have recognized that automatic service charges aren't covered by the no-withholding-gratuities statute!

Well, at least we can take some solace in the words of plaintiffs' counsel in the case, who keenly observed that "[t]his is a very good decision that might stop defendants from making these types of motions in the future."

(The real burning question of the case is ignored. When did 18 percent become automatic? Does anyone remember when the generally accepted tip calculation was 15 percent? What happened there?)

 The bottom line: Beware the law in tip-pooling cases which is still unpredictable.